Working Paper: CEPR ID: DP9519
Authors: Hans Degryse; Liping Lu; Steven Ongena
Abstract: The recent financial crisis has reopened the debate on the impact of informal and formal finance on firm growth in developing countries. Using unique survey data, we find that informal finance is associated with higher sales growth for small firms and lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Informal finance offers informational and monitoring advantages, while formal finance offers relatively inexpensive funds. Co-funding, i.e. the simultaneous use of formal and informal finance, is the optimal choice for small firms.
Keywords: cofunding; formal finance; growth; informal finance
JEL Codes: G21; G32; P2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Informal finance (G21) | Sales growth for small firms (L25) |
| Informal finance (G21) | Sales growth for large firms (L25) |
| Cofunding (O36) | Sales growth for small firms (L25) |
| Cofunding with minority informal finance (O16) | Sales growth for small firms (L25) |
| Cofunding (O36) | Sales growth for large firms (L25) |